The Executive Summary:
In the face of 2023's business climate, 72% of leaders are keen to grow, with 44% planning to invest more in innovative products and services, even with the ongoing challenge of balancing cash flow and investments for growth.
For cash-rich businesses, the decision involves a risk-reward calculation between reinvesting for higher returns or opting for high-interest savings, a choice younger leaders may be unfamiliar with. Businesses with weaker cash flows need to manage their debts carefully due to high interest rates.
Successful businesses tackle this challenge by balancing cash flow and profitability, minimising their cash flow gap, and accurately forecasting their cash flow to support daily operations and growth projects.
Regularly reviewing and forecasting cash flow, as well as finding ways to minimise cash flow gaps, will not only prepare businesses for immediate challenges but also support their long-term growth.
In July’s Aspirin's Leadership Gym, we focused on one of the most critical challenges of 2023: the intricate balancing act between cash flow management and investment for growth. Mindshop identified this as one of the top 10 business challenges this year, a complex equation even the most seasoned leaders grapple with.
Despite less than favourable confidence in this year's business climate, an optimistic 72% of leaders are ready to grow, with 44% asserting their intention to invest more in innovative products and services. Investments take on various forms. They may involve creating novel products, recruiting to boost sales, expanding premises, procuring machinery, augmenting training, or even acquiring other businesses.
In fact, simply ‘standing still’ demands investment, replacing ageing products, machinery, premises, or updating knowledge—something that we might call 'depreciation'.
For businesses that are cash rich, the decision boils down to a risk-reward equation: to reinvest for potentially higher returns or to opt for a high-interest savings account. It's a risk vs reward choice that's not been around for 10 to 15 years, so it’s one that younger leaders may be unfamiliar with.
Businesses with weak cash flow, however, will need to borrow to invest and balance their books very carefully. High interest rates have hiked up the repayments to services debts, starving the businesses of the cash to pay salaries and overheads, let alone invest. It's exactly the same for those of us with mortgages. We must find more money to service our loan, which means cutting down on other expenditure, and looking for ways to generate more income. We looked to our employers and clients, but they’re experiencing the same problem and can't or don't always respond.
So, how do strong businesses tackle this conundrum? Here are our Top 3 Tips:
Balance Cash Flow and Profitability: Profit generation remains a priority for most businesses. However, remember this golden rule: 'Profit is sanity and cash is king.' Ensure your business is generating both profit and cash.
Minimise your Cash Flow Gap: This is the period between money leaving and entering your bank account due to specific jobs or projects. If left unchecked, this gap can extend to three to six months, potentially causing businesses to falter due to cash shortage, rather than a lack of profit. Stage or Proforma payments and consignment stock can considerably alleviate this issue.
Forecast your Cash Flow: Unless your business has positive cash flow that supports daily operations and growth projects, a cash flow forecast becomes indispensable. Accounting software is only as good as the data entered, so you need to make sure that your organisation is keeping on top of this.
Precise cash flow forecasts empower us to adjust outflows, fill cash flow gaps, and make strategic decisions about our product and customer portfolios.
Reflecting on these insights, you should make it a regular task to review and forecast your cash flow, exploring ways to minimise your cash flow gap. By doing this, you are not only preparing for immediate challenges but also paving the way for long-term growth.